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Discussion Starter #1
Hi all --
We recently expanded our family and moved away from Vancouver (we couldn't afford a house in Vancouver so we bought a house in the Interior of BC and relocated). We kept our 2-bedroom townhouse in Vancouver as a rental property. We now have a good amount of equity in the rental property, so we're debating on whether to sell (and apply the proceeds to the mortgage on our new house) or to hold onto it.

Current Value of Rental property = $585,000
Remaining mortgage = $235,000
Rent generated = $2255 / month (this will probably go up as it is in a trendy area under development).

New Home Value = $590,000
Remaining mortgage = $445,000

Other than these two mortgages, we are debt free. 100k in RRSP/TFSA. 420k in my company (corp) investment accounts. We are 40 & 31 yrs old with a new baby. My company nets around $115,000 per year.
Any advice would be greatly appreciated.
 

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If you keep the Vancouver townhouse you will have to pay speculation tax on it. To me this is a no brainer. Sell it and pay off most of your debt.
 

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I thought speculation tax was for properties left vacant. The OP is thinking of keeping it as a rental, if I understand. Would it not just be subject to eventual capital gains tax and tax on the rental income in the interim?
 

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handwedge,

Can you say what the holding costs are on the townhouse? How much monthly for mortgage, strata fees, insurance, property tax, etc.?

You will soon be told here to cut and run in any event. The conventional wisdom hereabouts is that the property is an albatross around your neck if it does not gross 1% per month, i.e., a property valued at $585,000 should be bringing in $5,850/mo. You are a bit off that target.
 

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I thought speculation tax was for properties left vacant. The OP is thinking of keeping it as a rental, if I understand. Would it not just be subject to eventual capital gains tax and tax on the rental income in the interim?
I was wrong, sorry. But I still think it makes more sense to sell it.
 

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But talk to a lawyer about how you can avoid selling it to a money launderer. (Or a foreign "student" who owns 15 other units in the same complex.). If you aren't part of the solution, you're part of the problem.
 

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Discussion Starter #7
handwedge,

Can you say what the holding costs are on the townhouse? How much monthly for mortgage, strata fees, insurance, property tax, etc.?

You will soon be told here to cut and run in any event. The conventional wisdom hereabouts is that the property is an albatross around your neck if it does not gross 1% per month, i.e., a property valued at $585,000 should be bringing in $5,850/mo. You are a bit off that target.
Hey Mukhang,
Monthly mortgage payment = $1385
Strata fees = $315/mo
Prop tax = $1200/yr

With the current rent ($2255), we're very close to breaking even each month.

Thanks!
 

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Discussion Starter #9
I was wrong, sorry. But I still think it makes more sense to sell it.
I think I'm leaning that way. In the long term, I'd probably make more if I kept/rented it out. But it would be nice to pay our mortgage right down.
Also, we don't live in Vancouver anymore, so we have to pay 8% of the rent to a property manager.

Thanks for your feedback.
 

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Well handwedge, I am really going to go out on a limb here and be the only one who will suggest that maybe you should keep it. I'll leave the rest here to tell you about 1% rules, gross rent multipliers and a host of considerations to make it look like keeping that sucker will be the road to perdition.

You acknowledge being close to break even. So, not much, if any, cash flow from an asset worth $585,000. If you have spent any time reading on this forum, you will know that there are some who will say you should be paying no more than $100,000 for a "door" that will bring in not less than $1,000 a month. Hard to argue with that, I suppose. But not too many of them cheapie doors to be found in Vancouver. Maybe in a downtown eastside hotel. So, what are your choices?

You could sell and buy half a dozen or so rentals in Spuzzum, BC, or Windsor, Ontario, or some outpost in Newfoundland.

You could sell put the cash into your new place and have no mortgage. That might feel nice. The new home mortgage is greater than the rental home mortgage, which should be reversed for tax purposes, but that ship may have sailed.

Or you could keep it. I probably would.

Why do I say that? For one thing, they are making no more land in Vancouver. For another, it's Vancouver.

Back in the 1990s I moved from Vancouver to Los Angeles. I sold my Vancouver house (not a great idea) and bought one in LA. Lived there for 3 years and moved to a country in SE Asia and bought a house there (also not a great idea). Did not sell the house in LA as the market was lukewarm. I would have got my money back, but nothing for all the trouble I went to to find the place. So I rented it (Strike 1 - most will tell you never rent out a house in which you have lived. They can explain why.) Actually it was a duplex (Strike 2 - most will tell you that duplexes and triplexes are not "quality" investments. Again, I'll allow others to say why.) The initial rent was then about $4,500 US/mo. (Strike 3 - the house was worth about $600,000 US, so the rent was woefully shy of the 1% mark).

Here's what one fellow (his blog is here - http://kagansblog.com/ - wrote about LA awhile back:

Have been thinking about how amazing it is that a person can own land in LA.

I know that’s a weird thing to think about, but stay with me.

Land is permanent and, increasing density aside, they’re not making more of it.

It’s pretty amazing to me that, through actions taken in the course of one’s impermanent, transitory life, one’s descendants can, for as long as they’d care to, literally own this permanent thing.

And we’re sitting here in the 2nd largest city in America, one absolutely bursting with ideas, capital, connections, style, etc., and blessed with incredible weather and outdoor opportunities that differentiate it from all the other major metropolitan areas in the US.

And, with the right partners / investors and by finding the right deals, you or I or anyone with energy can literally stake a permanent claim to a piece of land right in the middle of all that dynamism.

Get the numbers right and you can even use (moderate!) leverage to magnify your outcome.

Seems like a pretty spectacular one-way bet, so long as you don’t do anything really stupid.


In the above commentary you could substitute "Vancouver" for "LA" and not be far off. Vancouver shares many of the same attributes. It's one of a few of what I call North American gateway to the Pacific rim cities. There will always be a market there to buy/sell/rent.

I still have the LA house. I have always managed it long distance. Not the hassle some would suggest. Being in the US, I do use a cross-border tax expert, although that is partly due to being lazy. I could probably just follow what he has set up for me in the past and come out okay. But he keeps up on the cross-border issues, how to calculate the tax credit here for income tax paid there, etc. As against the income, his fees are not much.

Today, that doggone LA house still balks at paying obeisance to the 1% rule, any GRM formula or much else. The market value has gone up, the rents have gone up, but that all-important ratio remains elusive. And I don't give a hoot. That's perhaps why I am not rich. Not a one percenter. I should have wised up long ago and sold that puppy and bought a city block in Radville, SK, or some such, and have pots more money coming in. It could be that if dynamite were brains, I wouldn't have enough to blow my nose. Problem is, I am happy. I seem to have enough, notwithstanding my fiscal ignorance.

Your are still on the young side. Your income is somewhat modest by today's standards, but by no means shabby. It also appears you have retained earnings in your company and you appear to have managed your assets well overall. So, looking down the road to age 65, you have the Vancouver place, paid off (another no-no apparently in real estate guru country - a paid off rental is somehow a burden and a shameful thing) and bringing in a rent which will keep up with inflation, as will the value of the underlying asset. Or you never pay if off, refinance every year and buy another rental every year. For me, one good one is enough.

So handwedge, maybe this has given you a bit to think about. I have made this post a tad tongue-in-cheek, poking fun at my own very unconventional (and perhaps foolhardy) notion of real estate investing. I hold other forms of real estate, some for investment purposes, but I have only one rental house. I seldom (if ever) mention it here, since it's so far beyond the pale that it can only evoke the opprobrium of more sophisticated members. I expect you'll choose the more conventional route and pull the pin on Vancouver.
 

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Discussion Starter #11
Thank you so much for the thoughtful reply, Mukhang pera. To accentuate my ignorance about real estate investing, I've never actually heard of the 1% rule (that seems like a foreign concept in BC!) I completely agree with your assessment of the Vancouver market, though. Not much land to build upon -- the city is slowly tearing down and rebuilding with taller structures.
On one hand, since the property isn't losing us any money (and the renters are covering the mortgage), it seems like a safe place to keep some cash (allowing us to diversify and not put all our eggs in the mutual fund basket). On the other hand, selling it and paying off a significant portion of our house mortgage would feel very good (relieve the stress of "what ifs" etc) and, in a way, creates portfolio diversification because we're paying down debt.

I've never considered selling and buying a handful of cheaper units (in Sask or elsewhere) but that's an enticing option as well. I wonder if Alberta will be a great spot to scoop up cheap rental property in the coming years. But as you said... how many rental properties does one really need? :)
Thanks again!
 

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If you ask nice, maybe muk will sell you some of his secret sauce which makes all your tenants perfect and long term.
It's commercial break time watching the Survivor finale (yes, I admit to being a fan), and, before my torch gets snuffed, I'll share my secret sauce, gratis.

No secret, really. Already mentioned. It's the reason why I suggest maybe your Vancouver property is worth keeping, handwedge. It's not difficult to recruit and obtain high quality long-term tenants in markets like LA and Vancouver. On the other hand, as JAG posted in just the past few days, his tenants are welfare types, with no insurance, whose careless smoking cause fire loss.

Suppose you buy a place for under $100,000 and it fetches $1,000 a month. At some point that tenant might harken to the fact that said tenant can buy a place for what is being paid in rent. Hence more turnover, even without fires. But, handwedge, what prospect does your tenant - who pays $2,255/mo. to occupy a house worth $585,000 - have to buy an equivalent Vancouver house? Not so likely to happen and, moreover, that tenant has little incentive to buy. Better to stick with you long term. Your vacancy rate is almost certain to be lower.

Another aspect to owning a rental in locales such as Vancouver, is better prospect for capital appreciation. Again, many investor types will say to forget about it, cash flow is all that counts. Me, I happen to like to see capital appreciation. My place in LA has appreciated by, conservatively, $65,000 US per year since purchase. Those like JAG will poo poo that, saying it counts for nothing until liquidated and in pocket. Take that as you will. But I am certain that your Vancouver property, 25 years hence, will sell for much more than today's price. I will acknowledge that, like the stock market, there will be down years in the long term. My LA place took a beating in the global financial meltdown that commenced around 2007. But the rent revenue did not abate. Not a bit. And the market came back. Stronger than ever, as Vancouver has done in cycles for decades.

Handwedge, do not take too seriously JAG's offensive comment that your are "lying to yourself" about cash flow. He says that to everyone. To say that "The equity portion of your money isn’t earning you anything" is fatuous and, moreover, no one has yet taken into account the fact that a chunk of your monthly mortgage payment of $1,385/mo. is paying down principal and is, in essence, positive cash flow. In time, the rents will retire the mortgage completely.

Handwedge, I have no horse in this race and my thoughts here are my own and tailored to suit the kind of investor I am. JAG will say i am unworthy of the "investor" descriptor. I don't care. To my way of thinking, you won't regret holding on to your Vancouver property, even if, in the short term, you do no better than break even.

I also take into account intangibles, such as pride of ownership. Maybe something a true "investor" should forsake. But i feel good about owning my LA house. Like you with your Vancouver townhouse, I chose it as my home. That in itself makes it a good rental because you know its strengths and weaknesses. I am fond of my LA home. It's a classic Spanish-style home, with red tile roof, turrets, etc., built in 1928 and carefully restored. 2,000 square feet on each floor. The lot is large, with lemon and orange trees, mature palms and foundation planting. I pay for garden service to keep the grounds as they should be. As my sister says, "it looks like a movie star home". I love owning it and love where it's located. I love LA, maybe an odd thing to say for one who lives off grid in the BC boonies. In short, I feel very good about my LA investment and, while I am perhaps deluding myself, the US dollars it brings in every month seem real to me. So yes, I have some emotional attachment to the place and that, I know, is antithetical to the way a true investor should look upon an investment.

As I mentioned, I am pleased with the capital appreciation I have seen, but I know until the cash is in hand, the gain is rather illusory. It's still nice to see, but, for me, it really matters little. LA is for my heirs. As the blogger I quoted above wrote: It’s pretty amazing to me that, through actions taken in the course of one’s impermanent, transitory life, one’s descendants can, for as long as they’d care to, literally own this permanent thing. Amen. I would have a hard time feeling as warm and fuzzy about a skid row condo. Even if the BC Ministry of Social Development and Poverty Reduction was paying the rent into my account every month.

Thus endeth another long essay, awaiting the wrath of JAG.
 

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Our landlord's family bought a farm on the edge of the city in the 1960s and built a village of townhouses. The city grew to surround their village of rental units.

Today we pay $1100 a month for a nice 3 bed/3 bath townhouse. Comparable rents are $1600 a month. Many good tenants stay for decades and there is a long waiting list.

At today's prices the rent wouldn't cover the costs, but over time the rise in property values hasn't affected our landlord's ability to have reasonable rent and a long waiting list of tenants.

If you own a property in Vancouver and can afford to keep it, you will own a rental that you can offer very competitive rent, earn a profit and have no problem finding long term tenants.
 

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So, looking down the road to age 65,
I have no bias either way as far as holding or selling. It depends far too much on an individual's circumstances and GOALS. Mentioning 65 to me is an assumption however and an assumption that might affect the best course for the OP.
 

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But talk to a lawyer about how you can avoid selling it to a money launderer. (Or a foreign "student" who owns 15 other units in the same complex.). If you aren't part of the solution, you're part of the problem.
I find that remark amusing. If I have something to sell, I sell it to the highest bidder. I don't care if he is a career criminal a la Good Fellas.
 

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If anyone is looking at investment real estate, my advice is to look for a place that is likely to grow in price. Edmonton and Calgary are historically cyclical for example. So when the time comes to sell, you may find it is in a down part of the cycle. Vancouver and Toronto are not places I would personally invest in even though I have owned there in the past. I just think residential real estate in those cities is just not predictable enough over the long term and again you could find yourself wanting out when the market is low.

Right now, I live in a small town of around 3000 Pop. It is a 2-3 hour drive from Toronto (depending on where in Toronto you are driving to/from). Over the course of the last 10 years, house prices have more than doubled. Why? Because Baby Boomers who live in Toronto have been retiring and moving out of the city to more affordable houses. They're cashing in on their high priced old house in Toronto in other words. That trend is set to continue for another 10 years. So it doesn't seem to take much thought to figure out that buying where they are moving to and then selling to them down the road is something that is pretty sure to work and not be subject to much possibility at all that prices will go down or even stagnate.

I don't think many investors in residential real estate are giving enough thought to the Baby Boom generation and what it can mean to them. The BBs are selling in the cities and moving out to smaller towns. This is happening around every major city in Canada. What's more it was and is predictable and it is also predictable that it will continue for the next 10 years. How many things does anyone know of as an investor where you can predict the future like that?
 

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We thought about moving to a rural area, but realized we would end up having to move again a few years down the road. We decided we didn't want to move again when we were older.

So we moved from a small city to a bigger city and that was that. Healthcare, shopping and entertainment were the main reasons for moving.

Some people did sell their homes in Toronto and commute to work from here, but the commute is too stressful now and people stopped coming.
 

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Have been thinking about how amazing it is that a person can own land in LA.

I know that’s a weird thing to think about, but stay with me.

Land is permanent and, increasing density aside, they’re not making more of it.

It’s pretty amazing to me that, through actions taken in the course of one’s impermanent, transitory life, one’s descendants can, for as long as they’d care to, literally own this permanent thing.

And we’re sitting here in the 2nd largest city in America, one absolutely bursting with ideas, capital, connections, style, etc., and blessed with incredible weather and outdoor opportunities that differentiate it from all the other major metropolitan areas in the US.

And, with the right partners / investors and by finding the right deals, you or I or anyone with energy can literally stake a permanent claim to a piece of land right in the middle of all that dynamism.

Get the numbers right and you can even use (moderate!) leverage to magnify your outcome.

Seems like a pretty spectacular one-way bet, so long as you don’t do anything really stupid.


In the above commentary you could substitute "Vancouver" for "LA" and not be far off. Vancouver shares many of the same attributes. It's one of a few of what I call North American gateway to the Pacific rim cities. There will always be a market there to buy/sell/rent.
I would just point out that this is merely a popular colloquial interpretation of how the world works, most popular amongst people of a certain advancing age who have not experienced anything other than peacetime expansionary, inflationary, urbanization, globalization policies aggressively implemented since WWII, and who will long be dead by the time any changes or detrimental effects of these policies come to fruition.

There is no economic law that says that populations densify indefinitely, that urban centers can't die, that land has cash value, or that the west coast is the natural and permanent destination for Asian assets.
 

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We thought about moving to a rural area, but realized we would end up having to move again a few years down the road. We decided we didn't want to move again when we were older.
So we moved from a small city to a bigger city and that was that ... Some people did sell their homes in Toronto and commute to work from here, but the commute is too stressful now and people stopped coming.
Whereas my relatives lived in Toronto then when retiring, sold and moved to a smaller city instead of a rural area. I'm pretty sure it padded their retirement stash while dropping crazy traffic out of the picture.:biggrin:


Cheers
 

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I would just point out that this is merely a popular colloquial interpretation of how the world works, most popular amongst people of a certain advancing age who have not experienced anything other than peacetime expansionary, inflationary, urbanization, globalization policies aggressively implemented since WWII, and who will long be dead by the time any changes or detrimental effects of these policies come to fruition.

There is no economic law that says that populations densify indefinitely, that urban centers can't die, that land has cash value, or that the west coast is the natural and permanent destination for Asian assets.
Just about anything said here and on other investing forums can be characterized as a "popular colloquial interpretation of how the world works". For example, the so-called "couch potato" method of investing draws heavily on lessons of the past as being predictors of the future. None of us have any divine insight into the future.

As for "people of a certain advancing age" who adhere to their colloquial interpretations, is there any economic law that says that the generations behind are endowed with greater investment savvy or knowledge of whence goeth the world?

BTW, did you check out the blog of the LA author I quoted? From his photo, I would not say he yet qualifies to be of a certain advancing age. Looks to be in his 30s and I would guess he has fared better than you economically, unless all he says is a tissue of lies.

Finally, with respect to your "no economic law" reference, rather trite is it not? I did not advance such a proposition, nor has anyone else that I am aware of. All any of us can do is, in effect, place our bets. In the real estate arena, I see major hubs such as Vancouver, Seattle, San Francisco, LA, as being west coast places that are likely good long term holds. There are others across the land. Toronto will probably be a good spot for the foreseeable future. I know less about places I have not actually lived. I am sure there are other good bets in the country.

In my own case, I choose to have but a single rental property, in part, to be diversified. If LA washes into the sea tomorrow, my life won't change. I have other irons in the fire. Me and my family in no way depend on the long term welfare of that one locale for our support. For now, I see it as a good bet. Any type of investment is, to some extent, a bet. Wise to never risk it all on one bet. If WWIII comes, or a good-sized asteroid strikes the earth, or climate change sinks us, all bets might be off.

However, Peterk, it sounds as though you have studied the matter and you know what will happen and when. Care to share? I am open to suggestion and learning. Can you say with some certainty that I should now liquidate my LA asset and move the money elsewhere? Come up with a sound strategy and I'll pay heed, despite my advancing age. You are fortunate, I suppose, that your age remains static and is not advancing. However, you seem to be foreshadowing some trying times ahead. Your immortality might turn into a curse.
 
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